7653 / How is original issue discount on corporate bonds issued before May 28, 1969 and after December 31, 1954 taxed?
However, if at the time of original issue there was an intention to call the obligation before maturity, the gain up to the entire original issue discount is treated as ordinary income.2
There was an intention to call before maturity if there was an understanding between the issuing corporation and the original purchaser that the issuer would redeem the obligation before maturity. The understanding need not have been communicated directly to the purchaser by the issuer and the understanding may have been conditional (e.g., it may have been dependent on the issuer’s financial condition on the proposed call date). Whether there was an understanding depends on all the facts and circumstances. That the obligation on its face gave the issuer the privilege of redeeming the obligation before maturity is not determinative of an intention, and if the obligation was part of an issue registered with the SEC and sold to the public without representation that the obligor intended to call, it is presumed that there was no intention at issue to call.3
1. IRC § 1271(c)(2).
2. IRC § 1271(c).